This is a guest post by Austin at The Logic of Money. Austin hopes that he can share his knowledge and tips with others to help make personal finance less stressful for everyone.
Paying your credit card seems like it would be pretty straight-forward, right? Well then why does your credit card statement come with so many different and confusing balances?
You’ve probably looked at your statement before and wondered, what exactly is the minimum balance, the statement balance, and the current balance? And you’ve probably also wondered, which one should I pay and how will it affect me? You’ve probably especially had these questions if you’re new to credit cards.
We’re about to break down exactly what each balance is, how paying each balance will affect you, and which balance is best to pay.
If you take nothing else from this article, just remember to always make payments! Failing to make payments will set you back financially and it could take several years to repair.
Without further ado, let’s learn how to pay your credit card the right way.
What are the Different Balances on Your Credit Card Statement?
Every month, you will receive a credit card statement that will highlight your different balances and minimum payment.
Your billing statement will also include information such as your beginning balance – the amount that was carried over from the previous month – any transactions you made, any payments you made, any credits from items returned, and all fees that you have encountered during the current billing cycle.
Typically, the billing cycle will be between 28 to 32 days depending on your credit card provider and depending on the month.
In addition, you will also see three different types of balances. Let’s break down exactly what each of those balances means.
What is the Minimum Balance?
The minimum balance, which is also sometimes called the minimum payment amount, is the minimum payment your credit card issuer will accept for that billing cycle to keep your account in good standing.
If you don’t at least make the minimum payment, you will likely be assessed a late fee or a penalty interest charge. If you continue to not make payments, your lender may take additional action such as reporting your account as delinquent.
If your credit card provider reports it as a delinquency, it could have a severely negative impact on your credit score. However, credit card issuers will typically give you 30 days to make the minimum payment after the payment is due before they will report it as delinquent.
Even though it may seem attractive to pay the minimum balance, you should always try to pay more if you are able. If you simply make the minimum payment, your credit card balance will continue accruing and you will start accumulating interest at a rapid pace. Eventually, your credit card balance may grow so large that you won’t be able to control it anymore and will be consumed by debt.
Making the minimum payment should be a last resort. If you run into some financial issues, you might be okay making the minimum payment for a few months, but you should try to get back on track as soon as possible. Making the minimum payment is better than not making any payment at all because it keeps your credit score from being damaged, but it sets you up for financial failure if you make a habit out of it.
What is the Statement Balance?
Your statement balance is the total of all of your charges during the previous billing plus any outstanding balance you had that was carried over from previous months. When you pay the statement balance, it is considered paying in full even though you may still have a little bit of a balance.
Paying the statement balance will help you avoid accruing any interest because you are technically not carrying over any of your outstanding balance into the next billing cycle. You could think of paying your statement balance almost like using a debit card. If your goal or plan is to pay the statement balance every month to avoid paying any fees or interest, then you should not make any purchases that you do not already have the cash to pay for them.
This is popular among many credit card users because it improves your credit score, gives you good rewards depending on your credit card, and you don’t pay any interest or fees on your purchases.
What is the Current Balance?
Last but not least is the current balance. The current balance is made up of your statement balance and any purchases you have made since your billing cycle ended. It is the most up-to-date balance on your credit card.
For example, let’s assume you make $500 worth of purchases in Month 1. Your billing cycle ends on the last day of the month and the payment for the $500 is due at the end of month 2. Halfway through Month 2, you have made $250 more of purchases and still haven’t paid your bill for the previous month. Your statement balance will be $500 and your current balance will be $750. It is your most up-to-date balance that accounts for all charges, fees, and interest that have not yet been paid off.
Many people also opt to pay the current balance because it completely resets your outstanding credit card debt. This absolutely ensures that your credit score will not be affected, you will not pay any interest, and you will not be assessed any fees.
This is also a great way to improve your credit score. A major factor in determining your credit score is your total credit usage. By paying your credit card balance down to $0, your credit usage will drop to 0% (assuming you have no other debts). This looks great to the credit bureaus and will surely give your credit score a boost.
How to Pay Your Credit Card the Right Way
Most experts will recommend that you pay the current balance every time if you can afford to do so. Many people will also recommend that you pay off your bill as soon as you get it rather than waiting until the due date so that you stay on top of your payments.
However, I argue that you should always pay the statement balance and you should wait until the due date to pay it. The reason is because you actually save money by paying the statement balance and waiting until the last minute to pay it due to the interest your money earns while it sits in your savings account, especially if you have a high-yield savings account.
Think about it this way. If you make $500 worth of purchases each month and pay it off as soon as your credit card bill comes, you will spend $6,000 over the course of the year and save $0 (ignoring any credit card rewards). But, if you make $500 worth of purchases each month and wait an additional month until the due date to pay your credit card bill, you will spend $6,000 over the year but you will also save about $90* during that same time period (ignoring any credit card rewards).
*Note: This is assuming you have a high-yield savings account earning 1.5% on your deposits
It may not seem like a lot but if I offered you the opportunity to have $0 or to have $90, with no catch, which would you choose? I’m going to guess you would choose the $90.
How do you pay your credit card the right way?
Regardless of which balance you choose to pay, the important thing is to make sure you keep making payments, even if it’s only a little bit.
I would argue that the best way to pay your credit card is by paying the statement balance each month on the due date. Next best would be to pay the current balance so that your outstanding balance is completely reset. And as a last resort, you should pay the minimum balance just to avoid hurting your credit score.
Whatever you choose, avoiding credit card interest is the way to pay your credit card the right way.
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